Question

Lynch Company manufactures and sells a single product. The following costs were incurred during the company’s first year of operations:

Variable costs per unit:
Manufacturing:
Direct materials		$      10
Direct labor		$       4
Variable manufacturing overhead		$       1
Variable selling and administrative		$       1
Fixed costs per year:
Fixed manufacturing overhead	$ 231,000
Fixed selling and administrative	$ 141,000

During the year, the company produced 21,000 units and sold 17,000 units. The selling price of the company’s product is $40 per unit.

Required:   

1. Assume that the company uses absorption costing:

a. Compute the unit product cost.

	Unit product cost

b. Prepare an income statement for the year.

	Lynch Company Absorption Costing Income Statement

2. Assume that the company uses variable costing:   

a. Compute the unit product cost.

	Unit product cost

b. Prepare an income statement for the year.

	Lynch Company Variable Costing Income Statement Variable expenses: Fixed expenses:

Answer 1

Construct The Absorption Costing Unit Product Cost
Direct Material				10
Direct labour				4
Variable Manufacturing overheads				1
Fixed Manufacturing overheads				11.00	(231000/21000)
Absorption costing unit prroduct cost				26.00
Construct the Absorption Costing Income Statement Under FIFO
				Year 1
Sales				$680,000
Cost of Goods sold				442000
Gross Margin				$238,000
Selling and distribution expense				158,000
Net operating income				80,000
Compute the Variable costing Unit Product cost
Direct Material				10
Direct labour				4
Variable Manufacturing overheads				1
Variable costing unit prroduct cost				15
Construct The Variable Costing Income Statement
				YEAR 1
Sales					680,000
Less: Variable cost
variable cost of goods sold				255,000
Variable selling expense				17,000	272,000
Contribution margin					408,000
Fixed expense:
Fixed Manufacturing overheads					231,000
Fixed selling expense					141,000
Net operating Income					36,000